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Student loan debt: 7 steps to pay it off

Robert Powell, Special to USA TODAY
Published 1:00 a.m. ET July 11, 2018

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National Collegiate Student Loan Trusts, one of the country's largest holders of student debt, has lost several lawsuits because of missing documents.
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New graduates line up before the start of the Bergen Community College commencement at MetLife Stadium in East Rutherford, N.J. Obtaining a college degree has increasingly coincided with ever-higher student debt loads. Since 2004, total student debt has climbed more than 540 percent to $1.4 trillion, according to the New York Federal Reserve.(Photo: Seth Wenig, AP)

While student debt itself does not significantly affect 401(k) participation rates for young workers who attended college — both those who graduated and those who did not — it does seem to shape how much college graduates save, the report says.

“Those with debt have only about half as much in assets by age 30 as those without debt,” wrote the authors of the report, "Do Young Adults with Student Debt Save Less for Retirement?"

For example, 30-year-old college graduates with no student loan debt have $18,200 saved for retirement on average while 30-year-old college graduates with student loan debt have saved on average between $9,000 to $9,300.

“Young graduates consider the simple existence of a student loan —rather than its size — to be a constraint on their 401(k) saving," the authors of the report wrote.

The authors noted that the drawback to such behavior is that some people save less for retirement than they could afford to early in their career. A related concern is that some participants also may not contribute enough to receive the full employer match, leaving money on the table.

So, what might young workers with student debt do?

Put things in perspective

Instead of saving for retirement, young workers tend to place a greater emphasis on short-term goals like saving for homes, families, cash reserves and, of course, paying down student debt, according to Douglas Boneparth, president of Bone Fide Wealth.

“As long as you have identified, qualified and prioritized your goals, along with mastering your cash flow, don’t feel bad,” he says. “There’s a lot of guilt being thrown at millennials for their inability to save."

In reality, he says, their financial circumstances are very different from the generations before them.

"They have student loan debt, low wage growth and more necessary expenses such as data plans,” he says.

Focus on your priorities

Kristi Sullivan, a certified financial planner with Sullivan Financial Planning, also recommends focusing on priorities. “First, build an emergency fund in your savings account of at least three months' living expenses,” she says.

And then, once your emergency fund is established, she and other advisers recommend contributing enough to an employer-sponsored retirement plan to get the full match, rather than paying more than the minimum amount due on your student loans. About 40 percent of companies contribute 50 cents for every dollar employees contribute up to 6 percent of their pay.

Pay off debt first

As with most things having to do with money, there are differences of opinion.

“To meet the objective of household wealth maximization, it is often best for individuals to focus solely on paying off student loans before they begin to save for retirement,” says David Nanigian, the director of the personal financial planning program at the Mihaylo College of Business and Economics at California State University.

But don’t follow that rule of thumb in the absence of some old-fashioned number crunching. Indeed, Nanigian recommends evaluating three scenarios to determine which might result in the greatest level of wealth depending on one’s target retirement date: 1. Pay off student loans as quickly as possible, and then save as much as possible for retirement. 2. Pay off student loans as quickly as possible, but also contribute enough to one’s employer’s retirement plan to receive the full employer match — beginning ASAP.
3. Save as much as possible for retirement.

(Photo: Getty Images)

A question of math

Whether you pay down your student debt loan as fast as possible, or save as much as possible for retirement or some combination of those tactics depends, Edwards says, on a number of issues. They could include: compensation versus the amount needed to fund one’s standard of living; expected returns versus loan interest rates; the tax deductibility of loans; the ability to consolidate loans; the need for an emergency fund; and future expected income.

"If it is higher interest rate debt, we encourage clients to pay down the debt quicker so they are not incurring high interest rate charges,” she says.

If, however, the debt has modest interest rate charges, and especially if it is a fixed rate, Campbell says the opportunity to invest extra dollars instead of paying down debt becomes more appealing.

Align your money with your values

Many young workers prioritize paying down debt over saving for retirement due to the emotional weight and cash-flow strain the debt causes on their lives, says Campbell.

“When talking about where to put discretionary dollars with clients, we focus on their long-term vision and the values they hold,” she says. “Some of our clients take great pride in being or becoming debt-free, while others want to optimize their situation in the long term, even if that means elongating their debt-payoff strategy.”

Sure, your employer match on a 401(k) is important, but your contributions are much more important.(Photo: Getty Images/iStockphoto)

What if you don’t have a 401(k) plan?

If your employer doesn’t offer a plan or doesn’t offer a match, consider learning about the time value of money and how to calculate trade-offs. “It’s all about opportunity costs,” says Edwards. “Contributing to an IRA with a low expected return versus applying those funds to paying down higher cost debt tips the balance towards debt reduction.”

Check your bottom line

It really does boil down to the young worker’s particular job circumstances and comfort level with debt, says Edwards.

Others agree. “If you are looking for an answer on whether to save for retirement or pay off debt, the answer is ‘it depends,’” says Campbell. “Both are important, and at the end of the day as long as the extra dollars are going toward one or the other, it's bounds ahead of having otherwise spent the money.”

Robert Powell is the editor of TheStreet’s Retirement Daily www.retirement.thestreet.com and contributes regularly to USA TODAY. Got questions about money? Email Bob at rpowell@allthingsretirement.com.